The R&D Manual is the cornerstone of a well-structured documentation regime for surviving an AusIndustry or ATO Audit. Most Business Managers and CFOs that I have met are unaware of the audit process. From the start, the audit process is onerous because when the notice for a Request For Information (RFI) is received, it will contain very detailed questions that will require a substantial and considered response. This response may be difficult to prepare, as it may be several years after the fact and you will only have 30 days.
Most companies will struggle to produce the requested information within the allotted 30 days. It could be that the information was produced for the purposes of the claim but not stored in a known location. In other cases, staff members that provided the information may no longer be with the organisation, thus complicating matters due to the knowledge gap. Ultimately, an inability to locate the records will cause a significant issue, as it makes substantiation of the claim very difficult. This may result in costly legal fees to defend the claim, and in the worst case, the repaying of the rebate.
This may sound like a lot of doom and gloom, however, careful prior planning and preparation can relieve the risk and stress associated with the entire claim and audit process. We recommend that you establish a cross-departmental R&D Tax Compliance Manual for record-keeping practices to ensure end-to-end business process integrity to satisfy the R&D Tax Incentive guidelines and produce the required records.
Well documented processes will ensure records are consistent from year to year, are not reliant on any particular staff members, and can be easily reviewed and audited. Process improvements can then be easily captured as amendments to the R&D Manual.
The R&D Manual needs to cover the responsibilities of each department in ensuring both Core and Supporting R&D is properly planned, managed, measured, and documented. Figure 1 below illustrates all the inputs that need to be collected throughout the R&D process to achieve compliance readiness.
The R&D Manual will outline the business process additions that will incorporate record-keeping into existing operational processes and practices so that they do not add undue overhead and avoid resistance from staff. Importantly the documentation needs to be produced as the R&D progresses (from eligibility assessment through to experimental results analysis) through each iteration so that it makes sense looking back at it.
Feel free to reach out and discuss these ideas, and more importantly, don’t hesitate to get started to prepare for the next financial year.